Buying house from parents is similar to a traditional real estate transaction, but it becomes more complicated when family relationships are combined with money matters. These six stages are your guide to navigating the particular problems with grace, avoiding conflict and ensuring a fair and peaceful experience for you and your family as a whole.
1. NEGOTIATE PRICE
It’s important to negotiate before buying a house from your parents because you can have an idea what your parents are thinking. Some time it happens that you want to buy house below market value and your parents want to sell house above the market value.
The best way to find the middle ground in this is to identify the market value of the house. You can then use that as a starting point for negotiations.
Get a CMA (comparative market analysis)
To help you determine how much your parent’s house might get if it were sold to an outsider, a real estate agent can consult regional databases of previously closed properties.
Try online valuation tool
An online home value estimator gives you a general idea of home sales, although the data may not be as precise as a CMA.
Get a home appraisal
A certified real estate appraiser creates a written report called a home appraisal. By comparing your home’s attributes to those of other sold properties in your neighborhood, the appraisal offers an objective assessment of your home’s value.
After that you can decide the amount between you and your parents. But keep one thing in mind, that the price shouldn’t be too low because that could lead to suspicions and inquiries about you. It could seem that you’re trying to take advantage of your parents’ old age by depriving them of assets or that the sale is part of a fraud or scheme.
2. Decide if you need professional advice
In order to save money on real estate commissions, legal fees, and other expenses associated with selling a house in Virginia, families frequently decide to buy or sell from one another. However, it also implies that you are responsible for being aware of the legal ramifications should something go wrong. Before signing a contract, if you have never bought a property before, you might want to think about speaking with a tax expert and a real estate lawyer. In the event that you and your parents are unable to agree upon a reasonable asking price for the house, a professional can also be of assistance.
Purchasing your parent’s home may also have tax ramifications, particularly if they are giving you equity or a down payment. See a tax professional for advice on what to avoid any unpleasant tax bills down the road.
3. Sign a contract to buy your parent’s home
After determining a ballpark figure, it’s time to prepare a purchase agreement. Once you have signed and dated the contract, its conditions will become legally binding. Generally speaking, the buying agreement ought to contain:
- The cost of the house, together with a thorough description of the address and its borders
- The names of the buyers and seller
- Who will pay what closing cost
- Anything that will stay or go with the property (such as personal property, fixtures and built-in shelves)
- The closing dates
A real estate agent you work with to assist with the sales will assist with drafting the buying agreement. They can assist you in navigating the specifics of the contract because they are certified and trained to adhere to your state’s real estate regulations.
4. Buy the home with a gift of equality
In essence, your parents sell you the house for less than its fair market worth when they give you a gift of equity, which makes the buying process easier for you. Stated differently, they are taking a lower price from you than they could get from a different customer. Your down payment is reduced by the difference between the sale price and the property’s worth. You may be able to avoid paying private mortgage insurance (PMI) on the loan if the gift exceeds 20% of the equity.
Your parents must submit a gift of equity letter stating their name, contact details, address, and the purpose of the donation in order to use the equity gift. A written assurance that you won’t be required to reimburse the donation amount must also be included in the letter.
Conventional Fannie Mae and Freddie Mac gift of equity rules
The most common types of house loans are conventional mortgages, which are governed by regulations set by Fannie Mae and Freddie Mac. Comparing the gift of equity rules from Fannie Mae and Freddie Mac will help you choose which is more suitable for your situation because Fannie Mae’s guidelines are more flexible.
| Fannie Mae gift of equity requirements | Freddie Mac gift of equity requirements |
| A portion or the entirety of the down payment on a primary house may be gifted to you as equity. | If the down payment is less than 20% of the total, you will need to contribute 5% of your own funds. |
| There is no financial contribution required from you. | ———————————————————————————- |
| A completed gift letter is required. The closing statement must reflect the gift of equity. | Prior to closure, you need to record the five percent of funds in your bank account. |
FHA gift of equity rules
Federal Housing Agency (FHA)-backed loans are typically more accommodating than conventional loans. Nonetheless, there are a few additional restrictions related to gift of equity requirements for FHA loans.
If you’re receiving a gift of equity for a 3.5% minimum down payment, you must prove one of the following:
- The home was your parents’ primary resident
- A copy of the lease and evidence of your six months’ worth of rent payments will attest to the fact that you were renting the house as your principal residence.
If you can’t meet the above requirements, then
- You’ll need a 15% gift of equity
- You have to provide a gift letter
5. Apply For Mortgage
You will need to apply for a home loan if you do not have the necessary funds to buy your parents’ house. Declare up front to your lender that you are purchasing from a relative.
A transaction that involves buying between family members is deemed to be “non-arm’s length,” indicating that the buyer and seller are connected. Lenders, however, will closely examine these kinds of acquisitions for indications of elder exploitation and mortgage fraud.
The mortgage rate of Virginia is 30-years fixed: 6.23 %
Consider a seller carryback if you can’t get a mortgage
In the event that you are rejected or do not meet the requirements for a mortgage, your parents may be open to discussing a “seller carryback.” In this arrangement, the property’s mortgage is maintained by your parents, who will also decide the interest rate and payment schedule. Usually, when you decide to sell your house, a line is put on it and a notice is issued that needs to be paid off. After your finances are in order, you can refinance and pay off the remaining amount. You pay your parents for a predetermined amount of time.
6. Closing Statement
You’ll need to arrange a closing in order to complete the deal. It may take place with an attorney, in a bank, or at a title company. Examine the closing documentation to make sure all the terms are accurate and that you are both paying the agreed-upon closing charges and amount. Three business days prior to the closing, if you’re getting a mortgage, you’ll get a closing disclosure that you should check before signing any papers.
Taxes consequences of buying your parents’ house
Another thing to keep in mind is the tax implications of buying your parents’ house. If you purchase the home while they’re still alive, you may have to pay capital gains taxes on the sale. However, if you wait until after they pass away, you may be able to avoid these taxes altogether. There is a tax exemption for the sale of a principal residence if it’s owned by an individual and the proceeds are used to purchase another principal residence within two years of the sale.
This is called the rollover provision and in order to take advantage of this provision, you must meet certain requirements, such as living in the home for at least two of the past five years and not having sold a home in the past two years.
Pros and Cons of Buying house from Parents
| PROS | CONS |
| A down payment might not be necessary. | If your parents feel they were treated unfairly, it could be detrimental to your relationship. |
| No other buyer will compete with you. | If your parents gift you the down payment, they may be subject to taxes. |
| If you are not eligible for a mortgage, your parents may serve as your lender. | Not doing your homework could result in property or title issues being inherited. |
FAQ’s on Buying House From Parents
Can I buy my parents’ house for 1$?
Indeed. Your parents are free to set the sales price, but since the IRS might consider the difference to be a gift, they may need to deal with possible tax ramifications.
Can I buy my parents’ house before they pass away?
The best individual to assist with answering that question would be an estate attorney. There are several things to take into account, such as whether your parents use the property as their primary residence, how long they stay in the house after the sale, and whether they sell it for less than what the market will bear.
What happens when you inherit a house from your parents?
First, you should think about the property’s title. There are significant differences between the implications of a Tenancy in Common and a Joint Tenancy with Rights of Survivorship.
Can I Buy My Parent’s House to Avoid Inheritance Tax?
Inheritance tax is imposed on the estate of a deceased person. The tax is levied on the value of the property inherited by the beneficiaries. However, if you purchase the property from your parents while they’re still alive, you may be able to avoid inheritance tax altogether. This is because the property will be considered a personal asset and not part of the estate. You should keep in mind that you may still have to pay capital gains taxes if you sell the property in the future.
Can I Buy My Parent’s House and Let Them Live in It?
Yes, you can buy your parents’ house and let them live in it. However, you should remember they may need to move into a nursing home or assisted living facility. If this happens, you may have to sell the property to pay for their care. You should also keep in mind that your parents may need to make repairs or updates to the property as they get older. This could include adding a ramp or widening doorways for wheelchair access. You may be responsible for paying for these changes.